AMC Entertainment (NYSE: AMC) shares cratered more than 85% in 2022. That’s an epic erosion of value! So is this now a chance for me to pick up AMC stock on the cheap? Or is this an investment I should steer well clear of?
Meme stock mania
As a reminder, AMC Entertainment is the world’s largest cinema chain. Its core business had been lacklustre for a good while before Covid, with growing debt and falling foot traffic in its locations. The stock had actually underperformed for years. Then the pandemic and the subsequent lockdowns were a sledgehammer blow to the company’s balance sheet.
However, AMC became a popular meme stock in 2021 when retail investors banded together across online forums and collectively bought the shares. Having started 2021 at just $2, the stock skyrocketed more than 36-fold to reach an all-time high of $72 just six months later.
This speculative interest saved the company from the brink of bankruptcy. Management seized the opportunity to issue new stock at high prices, raising significant amounts of capital.
In fact, when Cineworld (AMC’s competitor) filed for bankruptcy last year, its deputy CEO lamented also not getting caught up in the meme stock frenzy. He said: “While Cineworld would, of course, have welcomed the liquidity of becoming a ‘meme stock’ like AMC, we were never so lucky!”
However, fast-forward to today and the vast majority of the gains in AMC’s stock have evaporated.
Head-scratching moves
The company has continued to devise ways of raising further capital to pay down its substantial debt. While this is sensible with interest rates rising, some of its other ventures seem more questionable to me.
For example, the company made headlines last year when it announced it had bought a 22% stake in a gold miner called Hycroft Mining. AMC boss Adam Aron described the investment as “a bold diversification move”.
I see this as a bizarre use of capital, to say the least. The firm’s strength lies in trying to create — then extract — value from the moviegoing experience, not analysing gold mining stocks. It’s such a deviation from the core business that it makes me worry what other maverick moves might come next.
Box office recovery
That being said, there may be near-term positive catalysts for the stock. One is that the global box office is expected to recover strongly this year as more blockbuster films are released.
There was evidence of this last week when it was announced that Avatar: The Way of Water had hit $1bn in global ticket sales in just two weeks. More big-budget films are due in 2023.
Nevertheless, moviegoing isn’t expected to return to pre-pandemic levels until 2024 or 2025. If ever.
Will I buy the stock?
As renowned investor Ben Graham said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Never has this been more true than with AMC over the last two years. Over the long run, it’s the fundamentals of a company that matter most.
And with its shares heavily diluted and its net debt currently standing at $4.6bn, this company looks fundamentally unattractive to me. So I won’t be buying any shares.
